Archive for the ‘toxic assets’ Category

The Obama administration’s plan to remove distressed assets from bank balance sheets may take three months to begin operating, risking further deterioration in the value of the securities and driving up rescue costs.

By James Sterngold
Bloomberg

No matter how well the plan is designed, delays could mean that prices for mortgage-related assets will drop, requiring banks to take bigger writedowns and seek additional capital from the government, said Christopher Whalen, senior vice president and managing director of Torrance, California-based Institutional Risk Analytics.

“The government has said it thinks the assets are worth more than the 30 cents they could get in the market now — that it’s 80 cents or 50 cents on the dollar,” Whalen said. “But that 30 cents is going to look good in three months. Loss rates aren’t going to peak until late this year, when those assets will be going for five cents or 10 cents on the dollar. Absolutely they should move faster.”

The three-part government plan, announced March 23 by Treasury Secretary Timothy Geithner, requires a two-week comment period for one program, an application process for asset managers, analysis of the troubled mortgage assets to be sold and assessments of how much debt investors can take on.

As a result, the programs might not be operating before June or July, said Curtis Arledge, a managing director at New York-based BlackRock Inc., which plans to apply to become one of the asset managers for the public-private partnerships.

Falling Asset Prices

Two government officials, who spoke on condition of anonymity because no announcements on timing have been made, confirmed that the program won’t be operating until the summer. Once launched, it will create public-private partnerships to purchase as much as $500 billion of bad debts and securities from banks. The aim, Geithner said, is to allow the banks to clean up their balance sheets, attract private capital and resume active lending.

“The longer it takes, the more likely it won’t do the job,” said Robert Barbera, chief economist at New York brokerage ITG Inc., who supports the program because he believes that cheap government financing for the asset purchases will lift prices. “This allows the squeeze on the real economy to continue. The longer credit is not available from the banks, the greater the drag on the economy, and asset prices drop further.”

Barack Obama’s economic team is in serious jeopardy of getting bogged down as they attempt to extricate America from the “toxic asset,” bad bank and financial crisis.The objective is to get lending going and they centerpiece is trust and confidence.

Obama is banking that his strong poll numbers will translate into the public trust and confidence he’ll need to reform, some say overhaul, and some say radically attack the financial system and Wall Street.

But pollster Frank Luntz and others say although the public approves of Obama himself, they reject some of his policies.

It could just be that Geithener, Larry Summers and Barney Frank are ill suited to carrying the load they are under. And then again, maybe they created a load that is a load of c**p.

The Geithner, Summers, Obama plan may be too radical, too complex and too elusive to even explain — if and when the details become known….

have proved adept at designing complex financial products to sidestep existing regulations. And Vincent Reinhart, former director of monetary affairs at the Federal Reserve, says, “You’re going to see firms try to figure out how to be under the radar.”

For example, private equity investors might try to buy large hedge funds and chop them into funds that would be small enough to operate unregulated, Reinhart said.

The Geithner plan is now on the market….and the demand for “toxic assets” was weak on day one…

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Wall Street has managed a moderate gain after an attack of nerves had investors giving back a big early advance and then barreling back into the market right before the close.

Tim Paradis, AP Business Writer

Trading was extremely erratic — the Dow Jones industrials rose as much as 203 points in early trading in response to upbeat economic data, then fell nearly 110 during the afternoon before closing up 90. Analysts said weak demand during an auction of government debt stirred up worries about how easily Washington will be able to raise money to fund its economic rescue program. The fear in the market is that the government might not be able to easily raise the hundreds of billions of dollars it needs.

The day shows how fragile Wall Street remains despite a two-week rally that saw the Dow regain more than 1,000 points. The market was pulled in different by opposing forces Wednesday that led to choppy trading — which may well be the pattern for stocks going forward.

“Quite frankly, this amounts to robbery of the American people. I don’t think it’s going to work because I think there’ll be a lot of anger about putting the losses so much on the shoulder of the American taxpayer.”

That’s from Nobel Prize-winning economist Joseph Stiglitz. He is also a former World Bank chief economist.

“The Geithner plan is very badly flawed,” Stiglitz said.

Under the Geithner plan, the Federal Government would offer private investors with more than 90 percent of the funds to buy the troubled or toxic assets — that’s taxpayers’ money.

If the value of the assets goes up, the private firms make a profit and the taxpayers get their costs back.

If the value of the assets goes down, the taxpayers lose.

Either way, the money gets made not by taxpayers but by private companies.

The other problem with the Geithner plan is Geithner himself. As he said today before the House Financial Sevices Committee, he wants to have more power to step in when big non-bank financial firms are in trouble.

No one man should have that kind of power over private businesses, in our opinion, and certainly Geithner has not earned any confidence to allow us to even seriously consider the idea.

If Obama did not like Geithner’s moves into private business, his only recourse would be to fire Geithner and get a new Treasury Secretary…..

House Republican leader John Boehner told reporters the Treasury’s request for authority to shutter non-banks sounded like “an unprecedented grab of power.”

The Administration proposes legislation to give the U.S. government the same basic set of tools for addressing financial distress at non-banks as it has in the bank context.

The proposed resolution authority would allow the government to provide financial assistance to make loans to an institution, purchase its obligations or assets, assume or guarantee its liabilities, and purchase an equity interest.

The U.S. government as a conservator or receiver would have additional powers to sell or transfer the assets or liabilities of the institution in question, renegotiate or repudiate the institution’s contracts (including with its employees), and prevent certain financial contracts with the institution from being terminated on account of the conservatorship or receivership.

This proposed legislation would fill a significant void in the current financial services regulatory structure with respect to non-bank financial institutions. Implementation would be modeled on the resolution authority that the FDIC has under current law with respect to banks.

Before taking any emergency action, the Treasury Secretary would need to determine that resolution authority is necessary upon the positive recommendations of the Federal Reserve Board and the appropriate federal regulatory agency.

Now that President Obama has taken the “Harry Truman pledge” about the economy by saying “The buck stops with me,” it also seems appropriate for him to take the “Colin Powell pledge” by acknowledging of himself, “Once you break it, you are going to own it.”

By Jon Kraushar
Fox News

The first quote is a paraphrase of the sign on former President Truman’s desk reading, “The buck stops here” and the second is what former Secretary of State Powell says he told President Bush in 2002 about the danger of invading Iraq. Powell told The Atlantic magazine:

…what I did say was…once you break it, you are going to own it, and we’re going to be responsible for 26 million people standing there looking at us…And it’s going to take all the oxygen out of the political environment …

The real problem with Obama and the sentiments expressed in the two quotes above is that while the president would pay a political price by failing to turn around the economy, the buck actually stops with taxpayers and if the economy becomes even more broken we, the taxpayers, will own the consequences.

The question is, will Obama clean up this mess or add to it? Our fortunes—in every sense of the word—are riding on the outcome of that gamble.

The total tab for taxpayers is already mind-boggling. So far, it includes the $410-billion omnibus spending bill (with more than 8,500 earmarks) that Obama signed on March 11. Then there’s the $787-billion economic stimulus bill which passed with no Republican support in the House and only three Republican votes in the Senate. On Friday, the Congressional Budget Office predicted that the president’s proposed budget would produce a $9.3-trillion deficit during the period from 2010-19. That’s $2.3 trillion worse than the White House predicted in its budget and, if accurate, would make the deficit unsustainable, according to the president’s own budget director!

Further raising the stakes is a new program announced on Monday by Treasury Secretary Timothy Geithner that would partner the Federal Reserve, the Federal Deposit Insurance Corporation and the Treasury Department with private investors to buy from banks at a discount up to $1 trillion in deeply distressed (aka “toxic”) assets—mostly from soured mortgage loans—with the goal of finally properly pricing the assets and then, hopefully, selling them at a profit in the future. Hopefully.

According to The Wall Street Journal this past weekend:

“To encourage investors to buy those assets, the U.S. government will offer lucrative subsidies and shoulder much of the risk.”

That risk and other unknowns in all of this are staggering. Not since the Great Depression have we bet “the house”— “the house” being the economy—to this extent.

Both the danger and the opportunity of the situation take on additional meaning when you look into the origin of Truman’s phrase. “The buck stops here” derives from the expression “pass the buck.” In frontier days, during poker games, a knife with a buckhorn handle was placed in front of the person meant to deal next and if they didn’t want to, they “passed the buck.”

We’ve let Obama do the dealing and the stack of chips he’s gambling with is huge. — After all it’s our money and our nest eggs! The president could bankrupt our country (as New Hampshire Republican Senator Judd Gregg warned recently) or his plans could help it rebound, as Christina Romer, head of the White House Council of Economic Advisors has predicted.

In the age of cameras just about everywhere — including on city streets — Treasury Secretary Tim Geithner rolled out his new and improved “Public Private Investment Plan” before financial journalists today and without any live TV coverage.

While the president is urging public confidence, his Treasury Secretary is so uninspiring that he is making his big announcements almost alone.

Tim Geithner: Home Alone.

Mister President: Better staff up at Treasury fast and find a refill for Toxic Tim….

Geithner did rename “toxic assets” today….they are now legacy holdings.

The stock market is up in early trading….

Warning to Joe Biden: stay with the telepromter or you’ll end up like Geithner….

The Obama administration’s latest plan to help banks get credit flowing again is drawing a tepid reaction from investors and academics, who say the proposal comes with too many strings attached and is unlikely to stimulate lending industrywide.

Associated Press
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And even if banks are willing to start lending more money, they wonder if many people will be able to take on more credit until the economy gets going again.

“We went on a borrowing binge,” said Hugh Johnson, chairman and chief investment officer of Johnson Illington Advisors. “Debt levels, especially in households, are too high or unmanageable.”

The plan Treasury Secretary Timothy Geithner intends to announce Monday aims to create a new government entity — the Public Investment Corp. — to help buy up to $1 trillion in toxic assets on banks’ books.

The initiative will seek to entice private investors, including big hedge funds, to participate. It will do so by offering billions of dollars in low-interest loans to finance the purchases and by sharing risks if assets fall further in value.

Analysts agree that stabilizing the banking system is crucial. But some wonder whether the proposal will create more problems.

“It’s quite possible we could make bad banks out of good banks,” Sung Won Sohn, professor of economic and finance at the Smith School at California State University, said Sunday.

Sohn wonders whether the sale of assets at bargain prices, to remove them from banks’ balance sheets, would then force other banks to have to write down the value of similar assets they might not want to sell. He suggests it might be better if the government offered insurance that banks could buy to protect the toxic assets or offered some sort of loan guarantees.

Sohn and others also question whether hedge funds and other investment groups will want to get involved for fear that doing so will make them targets of new government regulation down the road. Sohn noted that Congress is considering a bill to impose a 90 percent tax on millions of dollars in employee bonuses paid by American International Group Inc. and other bailed-out firms.

“It’s very hard as an investor to take money into a plan with the government and sit and wonder if the government will change the song sheet midway,” said Quincy Krosby, chief investment strategist with The Hartford.

“It’s now to the point that you literally don’t know what they want to do,” she said of Congress.

Meanwhile, in trying to encourage lending, the government must take great care to avoid distorting incentives, said Robert Webb, a finance professor at the McIntire School of Commerce at the University of Virginia.

“Do you want to lend to bad creditors in a bad economic environment?” he asked.

Webb also said potential investors may be put off by the uncertainty over how a true market price will be set on some of these assets and over what guidelines will be used to determine how losses and profits get shared.

Over the weekend The Times and other newspapers reported leaked details about the Obama administration’s bank rescue plan, which is to be officially released this week. If the reports are correct, Tim Geithner, the Treasury secretary, has persuaded President Obama to recycle Bush administration policy — specifically, the “cash for trash” plan proposed, then abandoned, six months ago by then-Treasury Secretary Henry Paulson.

By Paul Krugman
The New York Times
This is more than disappointing. In fact, it fills me with a sense of despair.

After all, we’ve just been through the firestorm over the A.I.G. bonuses, during which administration officials claimed that they knew nothing, couldn’t do anything, and anyway it was someone else’s fault. Meanwhile, the administration has failed to quell the public’s doubts about what banks are doing with taxpayer money.

And now Mr. Obama has apparently settled on a financial plan that, in essence, assumes that banks are fundamentally sound and that bankers know what they’re doing.

It’s as if the president were determined to confirm the growing perception that he and his economic team are out of touch, that their economic vision is clouded by excessively close ties to Wall Street. And by the time Mr. Obama realizes that he needs to change course, his political capital may be gone.

Let’s talk for a moment about the economics of the situation.

Right now, our economy is being dragged down by our dysfunctional financial system, which has been crippled by huge losses on mortgage-backed securities and other assets.

As economic historians can tell you, this is an old story, not that different from dozens of similar crises over the centuries. And there’s a time-honored procedure for dealing with the aftermath of widespread financial failure. It goes like this: the government secures confidence in the system by guaranteeing many (though not necessarily all) bank debts. At the same time, it takes temporary control of truly insolvent banks, in order to clean up their books.

That’s what Sweden did in the early 1990s. It’s also what we ourselves did after the savings and loan debacle of the Reagan years. And there’s no reason we can’t do the same thing now.

But the Obama administration, like the Bush administration, apparently wants an easier way out. The common element to the Paulson and Geithner plans is the insistence that the bad assets on banks’ books are really worth much, much more than anyone is currently willing to pay for them. In fact, their true value is so high that if they were properly priced, banks wouldn’t be in trouble.

And so the plan is to use taxpayer funds to drive the prices of bad assets up to “fair” levels. Mr. Paulson proposed having the government buy the assets directly. Mr. Geithner instead proposes a complicated scheme in which the government lends money to private investors, who then use the money to buy the stuff. The idea, says Mr. Obama’s top economic adviser, is to use “the expertise of the market” to set the value of toxic assets.

But the Geithner scheme would offer a one-way bet: if asset values go up, the investors profit, but if they go down, the investors can walk away from their debt. So this isn’t really about letting markets work. It’s just an indirect, disguised way to subsidize purchases of bad assets.

The likely cost to taxpayers aside, there’s something strange going on here. By my count, this is the third time Obama administration officials have floated a scheme that is essentially a rehash of the Paulson plan, each time adding a new set of bells and whistles and claiming that they’re doing something completely different. This is starting to look obsessive.

PAUL KRUGMAN BLOGS ON THE TOXIC-ASSET PROGRAM to be announced early this week: “The Geithner plan has now been leaked in detail. It’s exactly the plan that was widely analyzed — and found wanting — a couple of weeks ago. The zombie ideas have won. The Obama administration is now completely wedded to the idea that there’s nothing fundamentally wrong with the financial system — that what we’re facing is the equivalent of a run on an essentially sound bank. … And if we get investors to understand that toxic waste is really, truly worth much more than anyone is willing to pay for it, all our problems will be solved. To this end the plan proposes to create funds in which private investors put in a small amount of their own money, and in return get large, non-recourse loans from the taxpayer, with which to buy bad … assets. This is supposed to lead to fair prices because the funds will engage in competitive bidding.

“But it’s immediately obvious, if you think about it, that these funds will have skewed incentives. In effect, Treasury will be creating — deliberately! — the functional equivalent of Texas S&Ls in the 1980s: financial operations with very little capital but lots of government-guaranteed liabilities. For the private investors, this is an open invitation to play heads I win, tails the taxpayers lose. So sure, these investors will be ready to pay high prices for toxic waste. After all, the stuff might be worth something; and if it isn’t, that’s someone else’s problem. Or to put it another way, Treasury has decided that what we have is nothing but a confidence problem, which it proposes to cure by creating massive moral hazard. This plan will produce big gains for banks that didn’t actually need any help; it will, however, do little to reassure the public about banks that are seriously undercapitalized. And I fear that when the plan fails, as it almost surely will, the administration will have shot its bolt: it won’t be able to come back to Congress for a plan that might actually work. What an awful mess.”

“We need confidence to make this recovery work,” President Obama said.

Well, confidence is lost: especially in Geithner.

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By Krishna Guha and Edward Luce
FT

….every time Mr Geithner opens his mouth the Dow heads in the opposite direction. Worse, perhaps, Mr Obama has got into the habit of expressing his confidence in Mr Geithner, a sure sign in more normal times that a public figure’s days are numbered.

A former high-flying career civil servant, Mr Geithner’s credentials are widely recognised. He has had extensive international experience, having spent much of his childhood in Asia and Africa. He studied at Dartmouth and Johns Hopkins before joining Treasury in 1988, where he found a mentor in Lawrence Summers, a Treasury official who is now Mr Obama’s senior economic adviser. At Treasury and later as head of the New York Fed, Mr Geithner has dealt with nearly every financial crisis in the past 15 years, including witnessing the start of a decade of stagnation in Japan when he was based in Tokyo.

“He is a smart guy,” Mr Obama told Jay Leno, the talk show host, on Thursday in his third defence of Mr Geithner this week. “He is a calm and steady guy and I don’t think people fully appreciate the plate that was handed to him. This guy has not just a banking crisis; he’s got the worst recession since the Great Depression.”

No Treasury secretary has been faced with such a cacophony of crises. In addition to shaping what could turn into a multi-trillion-dollar plan for the financial sector, Mr Geithner is in charge of restructuring the US car industry, overseeing the $787bn economic stimulus, providing relief to millions of struggling homeowners and co-ordinating a global response to the crisis from 20 leading nations.

“Secretary Geithner has taken more concrete actions to repair the financial system in his less than two months in office than others have taken in the course of years,” a Treasury official said.

Moreover, Mr Geithner, who, until recently, looked a youthful 47, is being asked to fight all these fires with a shoestring staff – he remains the only Treasury official confirmed in the job. Given the high ethical bar Mr Obama and Congress have set for nominees, Mr Geithner has struggled to bring in the people he wants. Like Mr Paulson, Mr Geithner relies heavily on informal advisers. However, unlike his predecessor, Mr Geithner’s team are not hand-picked loyalists. “We don’t have time to do preparation for anything – public appearances, testimonies on Capitol Hill, or any of the niceties,” said a Treasury official. “Nobody gets any sleep.”

All the while, Mr Geithner is having to fend off a vituperative campaign for his removal. Some allege he slipped up when he failed to prevent AIG, the bleeding insurance giant, from paying out $165m in bonuses to executives from the more than $170bn it has received in taxpayer funds. Others say Mr Geithner has lost credibility with the markets.

Still others claim that Mr Geithner, whose previous job at the New York Fed put him on the frontline of last year’s Wall Street crises, is too sympathetic to those he is bailing out. “Geithner has an incestuous relationship with Wall Street,” said Jim Bunning, the latest Republican lawmaker to call for his scalp. “Where’s the [bail-out] plan? You know, we still haven’t seen the plan and he’s been in office for six to eight weeks.”

Asked by CNN how he copes with the stress, Mr Geithner said: “I exercise. I talk to my family as much as I can”, but he has far less time now for his hobbies of playing tennis and basketball. Mr Geithner’s defenders say that he is caught up in a maelstrom of public anger for sins he has not committed – with some noting that only Mr Obama has the authority to tame the virulent populist mood in Congress.

But he has also created problems of his own, notably the revelation that he cleared more than $40,000 in tax arrears only after he was nominated. Even friends blanch at this one. “This was not Tim’s best moment,” says a former colleague. “If you’re going to be in charge of the IRS it seems reasonable to expect you would have a clean tax record.”

Mr Geithner survived but only after 34 senators had voted against his confirmation. More serious is his widely derided public speaking manner. Although accomplished at making government bureaucracy work from behind the scenes, Mr Geithner has scant experience in the arts of public persuasion and seems ill at ease in the spotlight.

This is not helped by the fact that he is boyish-looking and lacks authority in his delivery. In his first attempt last month to set out a plan for the financial sector bail-out, Mr Geithner seemed almost shell-shocked. The Dow dropped 400 points while he was speaking. Next week he will try again. But many in the markets, where Mr Geithner is now nicknamed “Tiny Tim”, have written him off. “Tim writes fine words – his speeches look good on paper,” said another former colleague. “But his delivery is bad.”

Mr Geithner’s public touch may improve – and Mr Obama can ill-afford to lose a Treasury secretary within his first 100 days. Moreover, Mr Obama has not always helped his colleague. Last month’s botched bail-out announcement failed in part because Mr Obama had built up such high expectations. This week, Mr Obama left his Treasury secretary scrambling when he instructed him to find a way to claw back AIG bonuses after Mr Geithner had said the administration had no legal means to do so. The suspicion also lingers that Mr Geithner lacks the internal clout to get his way. And there are rumours of differences with Mr Summers, whose intellectual ebullience can overwhelm even the hardiest of colleagues. While Mr Paulson was given a free hand at the White House, Mr Geithner spends much of his time negotiating policy with White House officials.

Ultimately, Mr Geithner’s fate lies in the health of credit markets. He will make a second attempt to unveil the plan to take toxic assets off bank balance sheets. If it passes muster, all else will be forgotten. If it fails, there may be little Mr Obama can do to shield him from Congress, the media and the public.